The goldsmith soon discovered how to make loans against which the borrower could write checks, written orders instructing the goldsmith (now, a bank) to pay someone from an amount deposited: they were able to create money

This money, based only on an entry in the goldsmith’s ledger, was accepted because of the public’s confidence that these claims would be honored

Another way a bank could create money was by issuing bank notes, pieces of paper promising the bearer specific amounts of gold or silver when the notes were presented to the issuing bank for redemption

Banks in London introduced checks

Principal difference between checks and bank notes

Checks could be redeemed only if endorsed by the payee

Notes could be redeemed by anyone who presented them

Representative money

Bank notes that exchange for a specific commodity

Paper money was often as good as gold since the bearer could redeem it for gold